Mobile technology, coupled with big data, can now let you know who’s coming into your storefront, how often, and what they’re purchasing. This level of personal detail at the individual level has created a new front in an age-old tactic: price discrimination.

But is price discrimination smart marketing?

Is it Discrimination – or is it Business?

From a business perspective, adjusting prices to reflect supply and demand is a natural course of action. Just the same, it is in a business’s best interest to ensure it is as profitable as possible by not leaving money on the table with customers.

As you might imagine, consumers have a different opinion about the fairness of price discrimination – the practice of changing pricing based upon market trends or consumer behaviors in order to maximize business profits is scrutinized heavily and viewed as unethical by some. Too often though, they don’t understand they ultimately have all of the control.

But the simple fact is that the individual consumer is really the one who dictates what the price will be. How so? Customers have a range, including a top price, that they will pay for a product or service, based on the value that product or service is perceived to have. If the price is within that range, customers are comfortable and believes they are receiving adequate value and benefit for their investment. The real challenge, of course, is identifying the range and ensuring you stay well within it.

The classic example of sliding prices is airline flights. Passengers who book very far in advance may have a big event (such as a wedding or work conference) that will not move, so they are inclined to lock in travel plans. As such, they are willing to pay a higher price. Over time, the price of the ticket drops before skyrocketing as the actual flight day and time approaches. Thus, the closer passengers purchase their tickets to their departure date, the higher the cost. Airlines capitalize on those passengers that tend to purchase travel without a lot of lead-time, maximizing profits.

Different Types of Price Discrimination

When the price is changed to fit different consumer groups, it’s called third-degree price discrimination. There is also second-degree price discrimination that occurs when the rate goes down if a product is bought in quantity (commonly called bulk-pricing). But it’s first-degree pricing that is really being affected by the constant stream of cell phone and IoT data that marketers have begun collecting and analyzing.

Economics Online defines first-degree price discrimination as, “when a firm charges a different price for every unit consumed.” This gives the retailer and manufacturer a chance to maximize their profit on every sale they make. Forbes points out the appeal of this strategy:

The more information we have, the more profitable first-degree price
discrimination will be. As big data and online buying increases the information
that business have on us, the ease and profitability of first-degree price
discrimination will become difficult to resist.

First-degree pricing strategies will become common as we grow more adept and processing the wealth of data being captured online, from digital devices, and from IoT sensors.

Companies like Progressive car insurance are using dashboard driving data to set prices for consumers. Instead of using a formulary to gauge risk, they’re using telematics data on driving habits to set insurance prices.

It is important to remember price discrimination doesn’t just mean boosting prices to maximize revenue – it can also mean offering discounts or special pricing to boost sales volume.

Retailers like CVS use loyalty programs to offer coupons when customers cycle through and are more likely to make repeat purchases. This is a discount tactic that identifies when customers are in the market for certain products and creates a sense of urgency to act.

How Do You Navigate?

While the process of using big data to set pricing is still in its infancy as a practice, the fact remains that it will only grow in its impact and significance to both consumers and businesses alike. The challenge is the strike a balance that maximizes your profits but does not cause customers to churn.